Basic HTML Version
Face the Facts
some industry projections estimate that if the standards are
approved as is, over $1.3 trillion would be transferred to u.s.
corporate balance sheets—with roughly 70 percent being real
estate leases ($900 billion).
Considering that figure, “all other types of leases might be
considered rather incidental,” says Greg Libertiny, CPA CFF ABV,
relationship manager at Real estate strategies Corp.
in addition to the significant lease accounting changes, at
a glance, here are some of the significant changes outlined in
the FAsB exposure draft:
• Lessee recognizes “right-of-use” as an asset and the
“obligation to pay rentals” as a liability.
• Right-of-use asset is initially recorded based on the pres-
ent value of lease payments plus initial direct transaction
costs, but less distinct operating expenses and property
taxes.
• the accounting lease term will be the longest possible
lease term that is more likely than not to occur.
• Contingent rentals (e.g., retail percentage rents) are
required to be estimated and included in the initial
measurement of the “right-of-use” asset and the “obligation
to pay rentals.”
• Lease term and payments are reassessed each reporting
period to include changes in projected renewals and
contingency rents.
experts point to a glaring issue that is lighting a fire under
business strategists to change the way they consider real estate
decisions going forward: the proposed new standards, at this
point, call for “no grandfathering of existing leases; all leases
would need to be reflected on the balance sheet upon adoption.”
As such, accountants like ed o'Connell, CPA/CFF, CFe, partner
at withumsmith+Brown, and leader of the firm’s iFRs
implementation, Convergence & Reporting team, suggest that
while clients shouldn’t be making business decisions based on
as-yet determined guidelines, they should be working hand-in-
hand with all members of their advisory teams to put strategy
in place.
“depending on how complex your company is, once the rules
are finalized, there may be a lot of accounting re-work to do
depending on how many leases you have,” o’Connell says. “For
this reason, leasing decisions today should be made considering
what may change going forward.”
Impact on Strategy
Going Forward
it’s quite clear that, regardless of exactly how the final
standards look, the changes will affect overall real estate
strategies and decision-making at large. Considering some of
the potential changes—buy vs. lease decisions, length of lease
options, impact of renewals and purchase options on lease
obligations, and subleasing issues—companies need to start
looking at their lease portfolios now for adequate lease
information, technology capabilities, and resources to
implement and monitor what will become the new standard.
“For the real estate industry, the impact of the proposed new
lease accounting changes will impact both the balance sheet
and tenant strategy and execution” Libertiny says. “For owners
and operators, the big shift will be in what their tenants
demand. shorter-term leases may be in high demand along
with an increased tenant appetite to forego renting in favor
of buying."
And, he adds, proper planning is critical because “the
decisions you make today in real estate are going to impact
everything for a very long time to come.”
Libertiny says it’s critical for CFos to add “real estate
professional” to their go-to team of advisors for all upcoming
lease/purchase strategies. “it used to be ‘my lawyer, my
accountant and my dentist.’ Now ‘real estate advisor’ should
be part of your team— even before you need to think about
real estate decisions. we can help to analyze a company’s
capital and operating structures to determine whether
leasing or buying makes sense going forward.”
with pending iFRs guideline changes looming, experts
suggest that CFos consider that while leasing decisions won’t
drive the business, they will play a bigger role than ever before
in the future.
And, the fact is, for growing companies, the future is now.
“You can’t afford to think about these things in two or three
years,” says Libertiny. “this is a long-term planning issue that
needs to be thought about now. if you are anticipating a
real estate decision in the next three to five years, start the
discussion with your advisors right now.”
v
www
.CFo
studio
.
Com
/ F
ALL
2011
Position yourself as a finance and strategy thought-leader.
Appear in a guest video interview on CFO Studio.
Visit www.CFOstudio.com to learn how!
17